I provide sound counsel and achieve outstanding results for clients in criminal and civil tax litigation and asset forfeiture litigation throughout the United States. I also perform estate planning for Michigan residents. My firm, Dunn Counsel PLC, is based in Troy, Michigan. I earned my B.S.B.A. cum laude from Aquinas College in 1978, my J.D. from Notre Dame Law School in 1985, and my LL.M. (Taxation) from Washington University in St. Louis in 1991. Before law school I was a Senior Accountant on the Audit Staff of Ernst & Young. This blog examines current issues arising in my law practice.

Relinquishing U.S. Citizenship

Facebook co-founder Eduardo Saverin caused a stir recently by moving to Singapore and renouncing his U.S. citizenship. In so doing he halved the income tax rate on his future income, from 39.6% in the U.S. to 20% in Singapore. He eliminated tax on his future capital gains ─the U.S. taxes capital gains at 15%, but Singapore dropped its capital gains tax effective February 15, 2008. He also will avoid estate tax at his death. The top rate of U.S. estate tax—which would apply to a large estate such as Saverin’s—increases to 55% on January 1, 2013. Singapore has no estate tax.

Saverin will avoid the tenacious U.S. worldwide tax system. The U.S. is unique in imposing its income tax on its citizens’ and its resident aliens’ worldwide income, offering them a credit for foreign tax paid on the income. The U.S. imposes its estate tax on its citizens’ and its resident aliens’ worldwide estates, allowing them a credit for foreign estate tax paid by their estate. To police this regime, the U.S. requires its citizens and its resident aliens to annually file a report, Form TD F 90-22.1 (“FBAR”), disclosing their foreign accounts. A draconian penalty lies for failure to report an account—up to 50% of the account balance.

Beginning for tax returns due in 2012, the Internal Revenue Service requires citizens and resident aliens with foreign financial accounts exceeding threshold amounts to file with their U.S. income tax return Form 8938, Statement of Specified Foreign Assets. A taxpayer who fails to file a required Form 8938 is subject to a $10,000 penalty. The penalty increases by $10,000 for each 30 days which the delinquency continues beyond 90 days, up to a maximum penalty of $50,000.

Many are incensed by Saverin’s conduct, as our country gave him the opportunity to earn his fortune. He did incur a substantial “exit tax” upon expatriating. Internal Revenue Code § 877A(a)(1) provides that a “covered expatriate” shall be treated as selling all of his property at fair market value on the day before the expatriation date. Thus, if Mr. Saverin’s only property consists of Facebook stock valued at $3 billion, and he has no adjusted basis in it, he incurred an exit tax, at the current U.S. capital gain tax rate of 15%, of $450 million.

(1) whose average annual net income tax for the five tax years preceding the tax year of loss of U.S. citizenship exceeds $124,000;

(2) whose net worth on the date of loss of U.S. citizenship is at least $2,000,000; or

(3) who fails to certify to the Secretary of the Treasury that he has complied with U.S. tax law for the five tax years preceding the year of loss of U.S. citizenship, or who fails to provide the Secretary evidence of such compliance as the Secretary may require.

Thus, a U.S. citizen who is not a “covered expatriate” can relinquish U.S. citizenship without incurring the exit tax. Those who are not exempt from the exit tax can exclude the first $651,000 of gain on the deemed sale of their property in determining the tax.

“Expatiate” for purposes of IRC § 877A(a)(1) includes a U.S. citizen who has committed one of the following expatriating acts with intent to relinquish U.S. citizenship:

(1) obtaining naturalization in a foreign state upon application after having attained the age of 18 years;

(2) taking an oath or making an affirmation or other formal declaration of allegiance to a foreign state after having attained the age of 18 years;

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Very interesting. One of the points that you are forgetting is that King George was unfairly taxing the colonies. Don’t kid yourself. “The great US” that you are so proud of was founded because the the colonists did not want to pay taxes to the King.

I think that is great about your pride in your son, but you should not be so proud of US and how they are treating the Vets.

I have the same emotional response that you have to the very idea of renouncing US citizenship and swearing an oath to Elizabeth II. Don’t knock Canada though. Thanks to the fugitive slave law the children of George Washington’s slaves were not safe from reenslavement until they made it to Canada.

Mr. Dunn, you wrote about the long-time Canadian resident, asking why should he pay US income tax and why should he report his assets to the US government. You avoided answering by veering off topic into the oath of allegiance that we swear to in becoming Canadian. Personally, I would like to know what you think the answers are to the questions you posed. To extend your example, assume this person has lived in Canada for 40 years, and was happy to swear allegiance to the monarchy, as Canada is his home and country. So why, simply because he was born in the US must report on the bank accounts he uses for daily living, both his and those held jointly with his wife? Why must he file income tax to the US at all (ignoring for the moment that taxes are higher in Canada and he’d owe nothing)? I can understand that you love your country. It may come as some surprise to you, but I love my country, as well. I am proud to be Canadian and I would not trade living in Canada for living in the United States – ever. To me, the US is a foreign country and I do not believe that any Canadian citizen should have to report on our finances or anything else, to a foreign government. What do you think – what is your answer to the questions you yourself posed?

I have to say Mr. Dunn that you are seriously misinformed on the issue of impact of IRS taxation of expats. The passages of the tax code to which you refer are but the surface of the issue. The truth about the negative impact of U.S. government extraterritorial taxation goes much deeper than you portray. First off we should start with the fact that U.S. extraterritorial taxation renders many of the tax laws of your land of residence null and void. U.S. tax law becomes the determiner of what investments you are allowed to make and not the investment regulations of the country under which you live. The losts opportunity returns that are involved with observing these investment restricions comes to many millions of dollars each year. I think that even you should understand the very territorial nature of tax law and how it can be harmful to the individual investor if he/she is barred from living according to the tax code under which his/her earnings and passive income is made. The Foreign Earned Income Exclusion Credit (FEIE), which many mainlanders are fond of pointing to as a major accomodation. is actually not meant as an accomodation but as a way for the U.S. to maintain its fictional right to tax its citizens. The FEIE is a form of Communist style income control that only expats are subject to. The FEIE is an arbitrary limit that is placed on the incomes of those who live outside of the States and it feeds into a false idea that the U.S. is actually exposed to income drain when its citizens work outside of the country. The truth is exactly the opposite. There is NO income drain that is suffered by the U.S. when a citizen takes up residence outside of U.S. territory. This is because the income that is earned is not earned in U.S. dollars. The U.S. Treasury can only suffer a loss from granting an income exclusion if the person or designated group of those who receive the exclusion are actually holders of U.S. none interest bearing debt instruments. Fiscal categories like exemptions, deductions, credits, exclusions are all different names for performing the same act which is that of shifting the tax burden of those who are account holders with the U.S. Treasury. U.S. citizens who reside abroad and earn their living under a currency other than the U.S. dollar are not account holders with the Treasury because they do not receive none interest bearing U.S. Treasury debt as a form of compensation. This means that anything that the U.S. Congress enacts as a means of moving around the nation’s tax burden is of no consequence for those who are not holders of the Treasury’s debt instruments as their means of compensation or measuring their wealth. To sum it up then the U.S. government can only tax, exclude, credit, exempt or grant a deduction to people who are account holders with it. I would recommend that you read the Tax Payer’s Advocate report of 2011 to the IRS and Congress. Nina Olson details very accurately the problems and complications that an U.S. none resident is subject to and she concludes by saying the compliance is next to impossible if your reside abroad. These taxation truths make it worthwhile to give up U.S. citizenship because there is no other way to build up wealth if you reside outside of the U.S. The U.S. has benefitted immensely over the years from the fact that the other countries of the world do not impose the same arcane tax reporting and investment restrictions on their expats as the U.S. imposes on its. In many ways the American growth story as been subsidized by all of the other counries of the world. Territorial taxation is the only fair system of taxation that is out there. Citizenship based taxation makes your citizens second class residents at home and demotes them to second class status when compared to their homeland cousins. Citizenship based taxation robs the treasury of other countries of their rightful tax and spending base and as such is a form of person Colonialism only without having to exercise soverignty over land or an organized, unruly poulace.

I would like to add for the benefit of all those out there who may think that Mr. Saverin’s 67 million dollar reduction in his tax bill is unpatriotic that tax avoidance is not a crime. The U.S. courts have never said that it is the obligation of citizens to maximize the amount of taxes that they pay nor has the payment of taxes ever been linked to one’s degree of partiotism. If the obligatin to maximize one’s payment of taxes were to truly be a patriotic act then many international U.S. domiciled corporations would be out of business for displaying a severe lack of patriotism. The patriotism of thos American citizens who do not pay income tax while still getting refund checks would also be put into question. Certainly the partiotism of those who are on welfare and unemployment insurance would be under scrutiny.

Bravo, Ms. Hudson, for putting your finger exactly on the point of contention in Mr. Dunn’s article. Taxation without representation was the foundational grievance of the American Revolution. Therefore, the whole notion that anyone who avoids the excessive and punative taxation now suffered in the U.S. is unpatriotic is at best misguided, at worst patently absurd and downright offensive. I wonder if Mr. Dunn bothers to itemize his deductions at tax time? If so, perhaps we should question HIS patriotism.

While I am loathe to insult Mr. Dunn’s well-intentioned patriotism (I myself have such feelings for my country), still I’m a bit surprised at Forbes’ editors for letting this one slip through for several reasons, including his tacitly implied notion that citizenship-based taxation is somehow a good thing, or at the very least, a necessary evil. In my opinion, it is neither.

Mr Dunn I am disappointed that Forbes would publish the comments you have made which could be perceived as offensive by America’s steadfast friends and allies in Canada. Your patriotism towards your country is laudable. Please show respect for the other nations of this world and their citizens. As you have indicated you are a citizen of the “greatest nation on earth” you have therefore the obligation to set an example, one which will foster sympathy and understanding amongst nations. Kindness and respect engender peace.